If the only things that come to mind when it comes to financial knowledge are some commercial banks or the state budget, think again! Apart from banks, finance is made up of components such as stock exchange, insurance, and much more.
The large inflow of cash produced by the mining sector in Mongolia will require a healthy and sound financial sector. Consequently, the Prime Minister has taken the initiative to successfully develop the Mongolian Stock Exchange (MSE) and signed cooperation agreements with the State Property Committee (SPC) and the London Stock Exchange (LSE). However, for it to be successful, our citizens participation is vital.
It has been established that most of the joint stock companies of the 336 shareholding companies registered on the MSE did not conduct their activities accordingly to the law. Although joint stock companies have to prepare and deliver an annual report to its shareholders, majority of the companies registered with the MSE do not send the required documentations and do not even pay dividends on a regular basis! According to international standards, investments into the capital market are equally balanced by commercial banks and stock market. The fact that 95-96 percent of investments in the capital market in Mongolia are contributed by commercial banks is certainly not a sign of a healthy system. Will the London Stock Exchange be capable of solving all these issues?
To improve the activities of the MSE, the decision was made to bring in a team of foreign experts to manage it. A year has passed since the management tender bid was announced. 10 teams from 11 countries initially showed interest in the tender, and when the London Stock Exchange, Frankfurt Stock Exchange, “Korean Exchange”, “Nasdaq OMX”+“Mosdaq” consortium passed the first-round, it was announced that the tender was cancelled. However, the signing of a cooperation agreement between the State Property Committee and the London Stock Exchange on New Year eve finally seems to have calmed down the passions that ran throughout the year over the cancellation of the tender. Not long after, representatives of the LSE arrived in Mongolia to draft a master plan for the development of the MSE. When Tony Weerasinghe, CEO of “Millennium IT”, and Director of Global Development, LSE Group, met with the Mongolian media, he announced that their primary aim was to make the MSE a leading stock exchange in Asia.
To do so, LSE has proposed to introduce the “Millennium IT” operating system to the MSE. However, an accredited representative from the State Property Committee at the MSE, Ch. Chinzorig, has highlighted that everything will be decided during the upcoming “Master Service Agreement” signing ceremony scheduled for April 20th this year.
So what does the “Millennium IT” do? The London Stock Exchange has acquired this Sri Lankan software developer in 2009. “This transaction provides the LSE Group with the fastest cash trading platform in the world. It will enable us to provide substantially lower latency, significantly higher capacity and improved scalability to cater the needs of our clients”, says Xavier Rolet, CEO of LSE.
“Millennium IT” company’s software program is used by the London Metal Exchange, ICAP as well as 22 other stock exchanges such as the American Stock Exchange, Boston Stock Exchange, etc. The LSE will also convert to this trading platform starting from 14 January 2010. Last October, information circulated that the “Millennium IT,” also-called “Millennium Exchange” trading system has set the record as the fastest trading system in the world. Apart from its speed, the ease of its use and affordability has attracted the attention of stock exchanges from many countries.
The London Stock Exchange was established in 1801. More than 2,600 companies from over 70 countries are allowed to trade on its market, and with 3.8 billion dollars worth of value, it tops the world financial market. In addition, it also ranks first with the number of registered mining companies. Mining giants such as “Rio Tinto”, “BHP Billiton”, “Anglo American”, and “Xstrata,” Global diversified mining group, trade their shares on the LSE; and our North neighbour’s largest companies such as “Gazprom”, “Lukoil”, and “Rosneft” are also registered with LSE. “Petro Matad,” the daughter company of Mongolia’s “Petrovis”, also raised capital on the LSE. It is worth noticing that this was the first occasion when a Mongolian company made an IPO on a foreign market. The fact that within a year the price of the company’s shares initially estimated at MNT800 grew five times to MNT4,000 shows how favorable London investors are to Mongolian companies.
The scope of cooperation between Mongolia and the London Stock Exchange will not be limited to technology only. Tony Weerasinghe told “Their Group will work to attract large foreign investors to Mongolia, and will cooperate in the areas of infrastructure and investment.” This, he said, “Will add an incentive towards the development of small and medium enterprises.” He added positively that by the end of this year structural changes will be made to the MSE. An agreement will be made for approximately three years, and a team of five people will arrive from London.
Tony Weerasinghe also pointed out that although the current MSE market value does not reach USD2 billion, its value could potentially approach USD25 billion in the near future. Tracy Pierce, Director of Equity Primary Markets at LSE Group, says “In comparison to others, the LSE has accumulated vast amount of expertise and experience during its 200 years long history. Therefore, we will not only create conditions to raise capital for Mongolian companies, but will help raise their reputation in the international arena too.”
Why does the LSE, the “Number 1” stock exchange in Europe, pay such attention to Mongolia? The London Stock Exchange has been studying the MSE - a mere 20 years to boast of in comparison to the LSE’s 200 years experience - for over a year. Tracey Pierce explained that they have been paying attention to developing countries and conducting studies on them for over a decade. Developing countries constitute 12 percent of the LSE total assets, a performance not to be underestimated. They have experiences of working with the Russian Federation, India, and Brazil. However, LSE Group is a business organization aimed at making profits and will not be making any charities. Consequently, questions inevitably arise concerning what LSE wants from Mongolia.
When the Prime Minister S. Batbold made a call to make Mongolian capital markets conform to international standards by highlighting the fact that if foreign companies can raise capital by using Mongolian mineral resources, why could Mongolians not do the same? S. Batbold has since agreed that new management techniques and progressive technologies be introduced by providing 20-30 percent of the MSE joint stock company to the ownership of a foreign stock exchange. Then there is no denying that the LSE will want to have a slice of their own creation for bringing the MSE to world standards. In any case, the MSE has already made the list of companies to be privatized, though officials refuse to comment on this. Ch. Chinzorig pointed out that operations need improving first, only then a decision on its privatization will be made. There is no doubt that in order to bring the MSE to world standards, it will require a significant amount of capital. The question on who will raise this capital – whether it will be done by the management team or the Government of Mongolia – still remains unanswered. Ch. Chinzorig says “It will be negotiated between the management team, State Property Committee, and Government.”
Although Mongolia’s economic growth is now reaching new heights, only several years ago, it was unthinkable that a Mongolian company would raise a capital on international stock exchanges. Now companies such as “Petro Маtad”, “Mongolian Mining Corporation”, “Hunnu Coal”, and “Kharanga Resources” trade their shares on the London, Hong Kong, and Аustralian stock exchanges and the Government of Mongolia set itself the goal of raising the MSE to world standards. However, it is doubtful that management by LSE alone will solve all the problems facing the MSE. The development of the capital market will depend upon its citizens first. It is said that all Mongolians will soon become the shareholders of “Erdenes Tavantolgoi” company. If understanding of shares by the citizens and businesses alike does not grow, no matter how well the MSE management is improved by the “Londoners”, it will be hard to harness the goal of becoming a “leading stock exchange.” In short, there is a danger of a repetition of the 1990’s blue and pink tickets fiasco. So, if Mongolia strives for development, it is important to raise people’s awareness to the capital market. The first step on the long journey towards becoming a leading stock exchange in Asia is for the Mongolian people to make by actively participating in the trading of shares, and for joint stock companies by conducting their activities according to international standards, and by playing the full transparency card.